Piggyback Fall-off + Uncle Sam Spikes Mortgage Insurance

Over the last few years with easy credit and soaring housing values, many mortgage borrowers by passed mortgage insurance in favor of so-called piggyback loans.

Mortgage insurance pays the lender should its borrower default on a loan.Lenders like this and typically require borrowers to purchase this insurance if the borrower’s down payment is less than 20% of the purchase price.The cost of this insurance averages between 0.6 and 0.8% of the loan and, until recently, has not been tax deductible.

So, given that Uncle Sam wouldn’t help pay for it and that fewer borrowers could afford a 20% down payment, the market was ripe for piggybacks which let home buyers avoid mortgage insurance by tying a second or third mortgage to the first.These can be called 80-20 or 80-10-10 loans where the second and third mortgages come with a higher rate than the first.All this is tax deductible.

When rates were low, the second and third mortgages were cheaper than mortgage insurance, especially with the deductibility angle.The mortgage insurance business contracted as the mortgage business exploded.

But now Uncle Sam has aided the insurers by making their product tax deductible about at the same time that the downturn in the real estate market has made piggybacks more costly.